Tax rule changes require re-planning

Advisers scurrying to learn new rules for same-sex married couples

Sep 1, 2013 @ 12:01 am

By Liz Skinner

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Financial advisers across the country are scurrying to learn new tax rules for same-sex married couples following the issuance of new guidance from the federal government.

The Treasury Department and the Internal Revenue Service announced Thursday that they will apply the federal “married” tax treatment for same-sex married couples no matter where they live — even in the 37 states that don't recognize their own citizens' gay marriages. The guidance is part of the government's implementation of the June 26 Supreme Court decision that struck down a key part of the Defense of Marriage Act.

“The Supreme Court fell a little short of full nationalization in its ruling, but the IRS, by doing this, is saying marriage is marriage no matter where you live,” said John McGowan, a financial planner and national leader of the LGBT and nontraditional family practice at Northern Trust Co.

“Very few thought that federal tax law would be imposed in states where federal marriage isn't recognized,” said Lorraine Johnson, an adviser with Triangle Financial Advisors.

Now there is no limit for married gay couples on the amount they can transfer to their spouses free of federal estate and gift taxes. Therefore, clients who have carried extra life insurance to offset potential federal estate taxes will no longer need those policies, said J.T. Hatfield Charles, an adviser with Raymond James Financial Services Inc.

Wealthy same-sex couples who are married also will be able to implement bypass trusts, an estate- planning tool that can minimize the taxes of a married couple at death, he said.

“Now, if marriage makes sense emotionally for my clients, I can tell them they should do it,” Mr. Charles said.

One negative that gay couples will face is the dreaded “marriage penalty” on income taxes that heterosexual couples have long complained about as unfair. Typically, if both spouses have high incomes, filing a joint return will increase the total income taxes they pay, as compared with what they paid when they filed as two individuals, he said.

“The marriage penalty could hinder many of our clients who aren't in the low- to moderate-income ranges,” Mr. Charles said.

One estate-planning tool that married gay couples will have to give up are grantor-retained income trusts, which unmarried couples can use to transfer assets and minimize the value of that gift, Mr. McGowan said. Such GRITs are only allowed for parties regarded as “legal strangers.”

Gay marriage is legal today in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington — and the District of Columbia.

The guidance issued by the Treasury Department means the financial plans of gay couples married by any of the 14 jurisdictions that have legalized same-sex marriage will look a lot more like those of heterosexual pairs.

Officials in the other 37 states will have to guide their citizens as to how to file their state income taxes, as well as state estate taxes. It is likely same-sex couples in those states still will have to file multiple sets of income tax returns with U.S. and state governments, Mr. Charles said.

The new rules do not apply to couples recognized in civil unions or domestic partnerships, according to Revenue Ruling 2013-17.

Tax refunds

Same-sex couples can submit claims for refunds for taxes they paid as single individuals — even though they were legally married — in 2010, 2011 and 2012. The statute of limitations for filing refund claims is three years from when the return was filed or two years from when the taxes were paid, whichever is later.

As for employers, the Treasury Department and IRS will issue streamlined procedures for those who want to file refund claims for payroll taxes paid on health insurance and fringe benefits for same-sex spouses. The two federal agencies will provide further guidance on how qualified retirement plans ought to treat same-sex spouses for dates before last Thursday's ruling.

“All eyes are on Social Security now,” said Mr. McGowan at Northern Trust.

Darla Mercado contributed to this story.

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